2.1.2 Inflation Flashcards
define inflation
a sustained rise in the general price level within an economy in a given time period
what are the consequences of inflation
sustained increase in the cost of living
fall in the purchasing power of money
what is the UK inflation target and why
2% - aims to provide price stability for firms and consumers and will help them to make decisions in the long run - increasing confidence
define disinflation
when the inflation rate is falling, but it remains positive - prices are still rising but at a slower rate
define deflation
a decrease in the general price level within an economy over a given time period (a negative inflation rate)
when does deflation tend to occur
during periods of very low or stagnant growth - slump
describe the process of calculating the CPI
survey to find out what a typical consumer spends their money on
basket of goods identified
each item in the basket is weighted according to the proportion of income spent on it
the %change in price since the same month last year is calculated
this is multiplied by the weighting
a weighted average %change (inflation rate) is identified
why is the CPI updated annually
to reflect changes in household spending patterns
why are weights used to calculate the CPI
to reflect the different amounts of money relative to their budget spent by consumers on each category of goods and services
what are limitations of using the CPI
basket of goods only representative of the average household
different demographics have different spending patterns
slow to respond to new goods and services despite being updated regularly
hard to make historical comparisons as technology 20 years ago was vastly different to now
what is the RPI (retail price index)
an alternative measure of inflation - unlike CPI, the RPI includes housing costs
RPI tends to have a higher value than CPI due to the inclusion of housing costs
what are 3 comparisons for CPI vs RPI
- RPI has been used for much longer than CPI, making it better for historical comparisons
- RPI is unique to the UK and if not consistent with the European Central Bank’s inflation measurement like the CPI is
- CPI is more accurate for making comparisons between European countries - UK’s preferred measure
if the CPI in 2020 was 150 and the CPI in 2021 was 160, what is the inflation rate between 2020 and 2021
10%
what is an index number used for
comparing/contrasting economic data
